MCF0617 Thesis Kari Johannsson A Study On The Use of Capital Budgeting To Support Investment Decisions in Iceland PDF

MSc in Corporate Finance
A STUDY ON THE USE OF CAPITAL

BUDGETING TO SUPPORT
INVESTMENT DECISIONS IN
ICELAND
June, 2017
Nafn nemanda: Kári Jóhannsson
Kennitala: 010476 – 5699
Leiðbeinandi: Páll Melsted Ríkharðsson
A STUDY ON THE USE OF CAPITAL BUDGETING
TO SUPPORT INVESTMENT DECISIONS IN ICELAND 1
Table of Contents
1. Abstract .................................................................................................................... 2
2. Introduction .............................................................................................................. 2
3. Literature review ....................................................................................................... 5
4. Method ..................................................................................................................... 9
4.1. Design ............................................................................................................................... 11
4.2. Propositions ..................................................................................................................... 14
4.3. Prepare ............................................................................................................................. 16
4.3.1. Questionnaire development ..................................................................................... 17
4.4. Collect............................................................................................................................... 19
4.5. Analyse ............................................................................................................................. 19
4.6. Share ................................................................................................................................ 20
5. Results ................................................................................................................... 21
5.1. General understanding and main process ....................................................................... 22
5.2. Goals and statistics........................................................................................................... 23
5.3. Which methods, how and why?....................................................................................... 25
5.4. Resource and education................................................................................................... 27
5.5. Respondent personal opinion and learning ..................................................................... 28
6. Discussion .............................................................................................................. 30
7. Conclusion ............................................................................................................. 35
7.1. The research questions .................................................................................................... 35
7.2. The Final proposition ....................................................................................................... 40
7.3. Further research............................................................................................................... 41
List of References ...................................................................................................... 44
Appendix 1 – Corporate finance tools overview .......................................................... 46
Appendix 2 – Script for conducting interviews ............................................................ 47
Appendix 3 – Interview summary tables ..................................................................... 54
General understanding and main process? ............................................................................ 54
Goals and statistics? ................................................................................................................ 56
Which methods, how and why?.............................................................................................. 58
Resource and education?........................................................................................................ 60
Respondent personal opinion and learning ............................................................................ 62
The common capital budgeting formula matrix – Large companies, summary ..................... 64
The common capital budgeting formula matrix – Medium companies, summary ................ 65
The common capital budgeting formula matrix – Small companies, summary ..................... 66
Reykjavik University June, 2017

1. Abstract
How do Icelandic companies, regularly faced with investment decisions, use capital
budgeting methods & theories to support their investment decision making? This
question has now been studied using case studies and in-depth interviews, adding a new
market and a qualitative approach to this international research subject. Although the
sample is small the results fit into the results of comparable quantitative studies. As
with other markets, the usage is mainly controlled by the size of companies, although
Icelandic companies do not hesitate to use the more sophisticated methods, despite the
lack of input information that is common on emerging capital markets like Iceland.
This research project studies the how and why of how certain capital budgeting methods
are used, and is intended to be informative to businesses that want to see what others are
doing and improve their own usage. In addition to answering the research questions, a
research based usage proposition is generated out of this project.
Keywords: Capital Budgeting; Corporate Finance; Investment decisions; Case Study;

Emerging Markets; Iceland
2. Introduction
This research journey started due to the researcher's personal perception of a gap
between how capital budgeting methods and theory were taught in Reykjavik
University (suggested heavy usage), and how it was used in the real-life Icelandic
business environment (hardly noticeable). The researcher has 17 years’ work
experience within the Icelandic and the Danish market and is also studying for a
Master’s degree. Unscientific research through conversations with co-workers,
university professors and friends and family supported his perception, and propositions
started to form, mostly based on the size of the Icelandic economy and cultural
differences. His curiosity to unravel the facts regarding this perceived gap has been the
driver for further and more scientific exploration and has eventually led to this research
project, where the aim is to provide a description or form a proposition around the use
of capital budgeting methods and theories in Iceland, by collecting and analysing
answers to the following research questions.

The main research question is:
• How and why do Icelandic companies, regularly faced with investment

decisions, use capital budgeting methods & theories to support their investment
decision making?
The following sub-questions will also be addressed:
1. What is the current main usage (if any usage at all)?
2. What affects the use of capital budgeting methods (method complexity,

educational level of staff, company size, company industry, actual and perceived
barriers, etc.)?
3. Is there room for usage improvement (and how)?
4. Is there a noticeable difference from the usage in other countries?
As described through review of the literature there is little or no research on this issue to
be found within the Icelandic market and there seems also to be a lack of research on
this topic within SME’s, not only in Iceland but in general.
The purpose of this research projects is firstly to serve as the researchers Masters theses
for the Reykjavik University and to answer some fundamental questions and the
researcher’s own curiosity following the master’s studies. It is also intended to be
informing and interesting for Icelandic businesses that want to have a better
understanding of how investment decisions are taken and supported with calculations
on the Icelandic market. And finally, this could also provide insight for universities and
consulting companies on how to best support the market in their advancement of
knowledge and decision making efforts.
The review of the literature has put a new perspective on the perceived gap between
theory and application. Although no Icelandic research has been found on this topic (as
stated before), several foreign research projects have been discovered. Out of this
literature study, there are several relatively common results. Size of firms and the
maturity of the capital market seem to be the biggest influencing factors when
comparing different markets. Smaller companies, are more likely to use “simpler”
capital budgeting methods (such as payback period or even intuition), and the larger
companies are more likely to use “advanced” methods such as DCF, IRR or NPV.
Companies on emerging capital markets (vs. developed ones) are also more likely to use
“simpler” capital budgeting methods, as some of the “advanced” methods require input
such as stock prices and beta which are usually not available except through active
stock markets. This is covered in more detail in the chapter on literature review.
The selected method for this research is case studies, in which 7 company cases, from
three size categories, have been selected from Icelandic manufacturing companies and
studied through qualitative in-depth interviews. The interviews were recorded,
documented into a transcript and analysed into a summary table. The summary table
(see appendix 3) was the basis for comparison and the foundation for writing the results
of this research report. Throughout the project, formulation of propositions was
developed, starting with early versions and ending with a final research based
proposition on the usage of capital budgeting methods and theories on the Icelandic
market.
The highlights of the results are that the cases within this study make a similar use of
capital budgeting methods and theories as could be expected based on the trend from
other markets, drawn from literature review. Size of companies is the strongest
indicator of usage, where the large companies are active users, medium companies are
selective users and the small companies are not using it, even though they feel the need
to do so. Similar to other emerging markets, data input for the formulas is somewhat
limited, especially regarding risk. However, what is different, is that of those
companies that are users, the more sophisticated methods, such as DCF, NPV & WACC
seem to be the preferred choices, even with the lack of input data. The perceived gap
between the educational suggested level of usage and actual usage is real, but it is not
confined to Iceland and has been seen in other comparable research projects. One of the
main reasons for using these methods to support the investment process is to make it an
organised and rule based process.
This research report starts with a literature overview on comparable research projects
from around the world, then it describes in detail the method that was used for this
research project, then the results from the interviews are presented, the researcher
discusses the highlights from the results, and finally the conclusions are summarized.
In the appendixes, can be found some details regarding the process of the project, such
as the interview script, result summary table, etc.

3. Literature review
Throughout this research, Iceland will be referred to as an emerging market economy,
opposed to a developed economy. Although Iceland has many characteristics of a
develop economy, such as high growth, high per capita income, high standard of living
and a good infrastructure, there are still a few factors that are more fitting to an
emerging market. It is a small market, with a low cost of public listing, and many of the
ICEX companies are relatively small and illiquid. The market has suffered low
stability, going through economic crises in 2008 and following that, faced currency
restrictions until 2017. In general, there are signs of low stability, low security and a
volatile currency. The common understanding of emerging markets is that even though
the infrastructure and the potentials are there, and the market can offer high growth, the
market is still considered risky. It proved difficult to find a peer-reviewed
documentation to support this categorisation but based on comparison with definitions
and coverage from internet resources, the researcher drew the conclusion to define
Iceland as an emerging capital market (Central Intelligence Agency, n.d.; Investopedia,
n.d.; Nasdaq, n.d.; Wikimedia Foundation, n.d.).
Based on number of citations, there are a few research projects that seem to be highly
respected with regards to capital budgeting research. The oldest one that will be
mentioned here is Graham & Harvey from 2001. They did a large cross-section survey
on 392 CFO’s (out of a sample of 4440) in USA and Canada. There are a few
interesting factors about their research project which relate to this one. USA and
Canada are highly developed capital markets, and even though the companies were of
all sizes, over 60% of the responding companies were public while less than 40% of
them were private companies. Even at that time and on that market, it was clear, that
the larger companies favoured Net Present Value (NPV) as a method for evaluating
projects and the Capital Asset Pricing Model (CAPM) for calculating the cost of capital
(and discount rate), but smaller companies favoured the Payback period to evaluate
projects. Graham and Harvey specifically mentioned research projects from 1956 (John
Lintner) and from 1983 (Moore and Reichert) as the most respected and most cited
research on the subject, but they will not be covered here due to their age (Graham &
Harvey, 2001).
Another repeatedly cited project is Brounen, de Joung & Koedijk from 2004. They
built on Graham’s and Harveys project and did a cross-section survey on 313 CFO’s

(out of a sample of 6.500) within UK, Netherlands, France and Germany, which are also
developed capital markets. As with Graham and Harvey the focus was on Capital
budgeting, cost of capital, capital structure and corporate governance. On average the
companies in this research were smaller than in the USA/Canada research and payback
period turned out to be the most used capital budgeting method. However, when
studied based on company sizes, larger companies are positively related to using DCF
for project evaluation and CAPM for cost of capital. The high use of payback period
surprised the researchers as it ignores time value of money and cash flows after cut-off
date, but stated that larger firms were more focused on maximizing the wealth of the
stakeholders, while the smaller firms are less focused on shareholders’ value and using
payback period on a discount rate requested by investors. This was especially relevant
for public companies (large company scenario) vs. private companies (small company
scenario). Public companies have stock prices at their disposal, as input into capital
budgeting formulas, such as CAPM, while private companies simply seek to fulfil their
investors’ requests when discounting cash flows. They also conclude that in corporate
finance practises, they find remarkably few differences across countries (Brounen, de
Joung & Koedijk, 2004).
Another research project is often cited, even though it was only published in 2015. This
is where Andor, Mohanty & Toth did a similar cross-section research survey focusing
on emerging capital markets within Central and Eastern Europe (CEE). They
interviewed 400 companies. This comparison on emerging and developed capital
markets is especially interesting for a research project in Iceland, which can be studied
as an emerging micro capital market. The main result is that corporate finance practices
in those markets are influenced mostly by firm size, management culture and code of
ethics. Payback period is the most used capital budgeting method. Furthermore, the
results suggest that top executives are mostly concerned with the long-term
performance (stability) and solvency (liquidity) of their firms instead of maximisation
of shareholder wealth. The following statement is made regarding the relation between
capital budgeting methods and emerging capital markets: “…most of corporate finance
theories have been developed under the assumption that capital markets are “semi-
strong” efficient. However, this assumption seems to be questionable when it is applied
to emerging markets that are typically characterized by higher information
asymmetries, higher transaction costs, relatively concentrated ownership with small
and medium enterprises, and relatively low market liquidity” (Andor, Mohanty & Toth,

2015, p.149). Similarly, the use of CAPM is low, due to most companies on the market
being privately held small-medium companies, and the equity beta for such firms can
only be estimated with analysis of comparable publicly traded firms, which are difficult
to find (Andor, Mohanty & Toth, 2015).
A research conducted in Kuwait, with 908 respondents from listed and unlisted
companies in the Kuwait Stock Exchange, confirmed similar results as formerly
mentioned. In their research, they highlight and repeatedly mention the gap between
business practice and academic theory, in the use of capital budgeting methods. They
even go as far as to say that many studies have documented such fundamental
differences and that this gap has long been a puzzle to the academic community
(AlKulaib, Al-Jassar & Al-Saad, 2016).
There are other research projects confirming similar results. A research survey on the
Serbian market showed payback period as the most popular capital budgeting method,
and size of companies having the greatest influence on the choice of more or less
sophisticated capital budgeting methods. Lack of efficient and liquid capital market is
one of the main reasons for little use of the more sophisticated methods. Education is
also mentioned as an influencing factor but with much smaller effect than company size
and maturity of capital markets (Barjaktarovic, Djulic, Pindzo & Vjetrov, 2016).
There is a similar story from South Africa, where research was conducted on the SME’s
found on the Alt X stock exchange. Again, the result is that smaller companies use
simpler methods like payback period, while the larger ones use more advanced methods
such as NPV and IRR. The main argument mentioned here is that the larger companies
have reached a focus on shareholder wealth maximisation, but smaller companies have
challenges in acquiring external funds for investment purposes and are therefore
focusing on projects with short payback periods to increase the possibility of internal or
external funding. Size of available capital budget as well as education are mentioned
here as influencing factors regarding the choice of capital budgeting methods (Hall &
Sibanda, 2016).
Although this research is avoiding professionals in capital budgeting usage (finance

companies) and focusing on standard business, there was one study focusing on
professionals that is worth mentioning. It was a research survey that was conducted on
valuation professionals (consulting, investment banking, private equity or asset
management) in Western Europe in 2012. The survey was sent to 4,500 investment
professionals, out of which they received 299 responses. Multiples was the most used
method (even though it does not have big focus in financial education), but DCF was
the most used multi-period model, though often used in a way that turned it into a
multiple exercise. WACC was most often used for discounting in DCF models.
However, what is interesting regarding the result from this research, is the usage
learning pattern. That is, the budgeting methods used, differ more between professions
(consulting vs. investment banking vs. private equity vs. asset management) than they
do based on education, experience or purpose of evaluation. This would mean that they
use the methods learned from their co-workers, rather than what was taught in school.
As an explanation, they quoted an article from Scientific American in 2009: “I’ve put
together a lot of evidence showing that children learn at home how to behave at home
(that’s where parents do have power!), and they learn outside the home how to behave
outside the home. Parents matter much less, [...] a child’s peer group is far more
important.” (Mukhlynina & Nyborg, 2016, p.34). All in all, this research indicates that
advanced capital budgeting methods are less used among highly educated valuation
professionals than one would suspect, which again raises the question on how much
expectation should be put on non-professional standard companies in their valuation
efforts to support investment decision making (Mukhlynina & Nyborg, 2016). In fact,
the research started with an introductory quote that sets the tone for the research in
general: “There seem to be lots of academics asking how analysts in the real world use
CAPM or calculate the cost of capital. The answer is, people don’t waste time on this.
No one ever lost/made money because they calculated the WACC better than consensus.
You academic [sic] guys are wasting your time. –A consultant” (Mukhlynina & Nyborg,
2016, p.1).
It is worth considering how capital budgeting methods & theories are connected to
decision making with the business environment in general. March divides decision
making into three main categories. Firstly, he describes decisions as intendedly rational
choices where emotions, personality and risk preference are major factors in decision
making. Secondly, he describes decision as rule-based actions where all the rules of our
societies, groups and organisations, as well as perceived appropriate behaviour plays a
major role in decision making. Thirdly, he describes decisions as artefacts and basically
the result of a complex balance between networks, symbols, limited information, etc.
This third category tends to be the most common reality within organisational decision
making and can be very complex (March, 1991). The purpose of capital budgeting

methods and theories can be described as an attempt to bring rules and information
clarity into the decision process. Thus, moving the decision making from methods one
and three towards method two. The methods and theories are a set of calculation rules
that should be applied in the same or similar manner for multiple financial investment
situations. If used correctly, it can produce very useful information for comparing
options and taking decisions on e.g. complex investment options. However, it cannot
be ignored that these methods only deliver information for decision making but does not
necessarily deliver the final decision directly. The decision problem may therefore still
be at hand after using capital budgeting methods & theories. It must also be noted that
even though the calculations are used correctly, it can be a decision on its own to select
the right inputs for those calculation methods. It may therefore be difficult for
companies to rely on capital budgeting methods & theories to move decision making
from March’s third category of decision making to the second.
In this light, it is interesting to compare the theories of March to Mukhlynina &

Nyborg’s research results. In that research, it is stated that valuation experts abandon
the formal and common educational capital budgeting methods (to some degree) and
use the methods that have become standardised by their professional peers. This may
be considered as a step from March’s category two (rule based actions) towards
March’s category three (networks, symbols and limited information). It seems that
traditions and habits are strong behavioural motivators within the environment studied
by Mukhlynina & Nyborg.
4. Method
The main goal of this research project is to provide a description or form a proposition
around the use of capital budgeting methods and theories in Iceland, by collecting and
analysing answers to the following research questions:
The main research question is:
• How and why do Icelandic companies, regularly faced with investment

decisions, use capital budgeting methods & theories to support their investment
decision making?

The following sub-questions will also be addressed:
5. What is the current main usage (if any usage at all)?
6. What affects the use of capital budgeting methods (method complexity,

educational level of staff, company size, company industry, actual and perceived
barriers, etc.)?
7. Is there room for usage improvement (and how)?
8. Is there a noticeable difference from the usage in other countries?
As the research questions in this project focus on how and why the methods are used,
the qualitative research method “Case Study Research” was selected for this project. A
case study is where one or more cases are studied carefully and used to explain or draw
conclusions on a bigger scenario/picture/development/etc. It is just one of many
possible research methods to choose from, such as experiments, surveys, archival
analysis, etc. It is argued that the Case Study method is useful for working with “how”
and “why” questions, in situations where no control is required of behavioural events,
and where the focus is on contemporary events (rather than historical) (Yin, 2009, p. 8).
This is a good fit for this particular project as the goal is to research how Icelandic
companies are using capital budgeting methods & theories to support their investment
decision making, why they are using those methods in this way, and how can their
current use be improved (if possible). During the research, there will be no control of
behavioural events, as this is simply a study on selected cases on an active market,
which has developed into its current form over a long period. The research focuses on
how companies are using the aforementioned methods today. No historic research is
needed, but if it were needed, it would at most cover one or two decades. Such a short
historic span can be considered as contemporary (Yin, 2009, p. 11).
Even though the case study method is considered a good fit for this research project,
other methods are used in a careful combination. An example of this would be review
of the literature. During this research project, a literature review will mainly be used to
study what has been researched and how this project will build on that, to carefully
prepare a successful case study project, to have deeper understanding and to develop
sharper and more insightful questions about the topic. The result of this project will
mainly come from the case studies, less from the literature review. But the literature

review will help to provide insight, match results between research projects and to
interpret the case study result and provide help in drawing conclusions (Yin, 2009, p.
13-14).
This research project will differ from the research covered in the literature review
chapter in two ways. Firstly, it is covering a new market, adding the emerging micro
market of Iceland to the research portfolio on this topic (Nasdaq, Inc., n.d.; Wikimedia
Foundation, Inc., n.d.; Central Intelligence Agency, n.d.). Secondly, it is a qualitative
research project, focusing on the how and why, through in-depth interviews. This is
opposed to the quantitative questionnaires through mail or phone that have been the
chosen method for most of the research reviewed. The goal is to answer the
researchers’ questions, to form a proposition about the Icelandic market and at the same
time, to add a new perspective to this research topic.
Robert K. Yin’s book “Case Study Research: Design and Methods, fourth edition” from
2009 is the main guide for the method used in this project. A description of the method
will follow a similar chapter structure as Yin’s book, although with an additional focus
on propositions.
4.1. Design
The purpose of this research project is to get an understanding of how Icelandic
companies, regularly faced with investment decisions, use capital budgeting methods
and theories to support their investment decisions making. To arrive at a qualitative
understanding, the method of “Case Study Research” will be used to interpret the
behaviour within the selected cases. A holistic multiple case design will be used where
each case is a carefully selected Icelandic company.
The context for the case selection is the following. Excluded from the pool of case
selection are banks and financial companies that in many ways specialise in this type of
knowledge (capital budgeting methods and theories), and in many cases, make a living
from helping other companies and generating revenue from that knowledge. Within the
pool are “normal” companies that are regularly faced with investment decisions.
In order to limit (to some extent) other factors that may influence comparison between
cases and the results of this research project, all the cases will be selected from one
industry. The expectation of selecting cases from only one industry, is to reduce the

standard deviation of the average “score” of a few important factors (between cases),
such as: types of investments, types of employees working there, employee educational
level, economic environment, etc. The selected industry is Icelandic manufacturing
companies. Within the industry are many companies, producing a wide variety of
products, and ranging from some of Iceland largest international companies down to
very small startups. In addition, the nature of manufacturing companies is often such
that they need to start by investing before they can start producing anything. It is
therefore likely that manufacturing companies of all sizes and shapes are familiar with,
and regularly faced with investment decisions. This industry choice should provide a
sufficient pool of cases to select from.
Another context sub-category will reflect the size of the companies studied. Most of the
research projects that were reviewed, comparable to this one, have a research focus on
large enterprises, and some also covered medium-sized ones. However, many studies
have shown that size of companies is a major factor influencing the use of capital
budgeting methods and theories. In addition to that, Iceland is a small market with a
relatively high level of education (Organisation for Economic Co-operation and
Development (OECD), 2013) and degreed students are certainly not found only within
the largest companies, but rather in companies of all shapes and sizes. Because the
market is small, there are relatively few large companies. Therefore, it is also of interest
to study small and medium sized enterprises (SME’s). According to the European
Commission, companies are among other areas, categorised based on number of
employees; 0-49 employees being small companies, 50-249 employees being medium
companies and over 250 employees being large companies (European Commission,
n.d.). Initially, the aim was to select 2-3 cases from each of these three categories for a
total of 6-9 cases for study. First two selections were made in each category and then
additions made if the results were expected to be improved with additional cases, and if
time and effort would allow. This should give a good insight into the market, and
perhaps give some insights into possible differences between sizes of companies. Yin
states that the number of companies studied is a matter of judgmental choice (Yin,
2009, p. 58). During data gathering it was decided to add a third company to each
category. However, obtaining the additional cases proved more difficult than anticipated
and time and effort did not allow for additions to all categories. The final result was a
study of 7 companies that are included in the data for this research.

Further information on the 7 companies are given in the following table. There were 3
large companies, 2 medium companies and 2 small companies. Each case got a case
letter assigned for recognition and the role of the interviewed respondent or respondents
can also be seen.
#1 #2 #3
Large Case A Case D Case E
companies CFO Controller VP Corporate
Development
Medium Case B Case C
Companies Production director CFO &
Managing Director
Small Case F Case G
companies Managing Director Owner &
Managing Director
Table 1: Case information
For a selected company (case) to be valid in this study, the company must have had at
least one investment opportunity within the last two years where an investment decision
had to be made, with or without the use of capital budgeting methods. The interviewee
was required to have direct knowledge of the procedure applied to the investment
decision. Without such knowledge and such an opportunity to discuss, it would be very
difficult to evaluate the decision process of the company and the use (or non-use) of
capital budgeting methods and theories. Investment options are defined in many
different ways, but a useful definition can be found on Investopedia: “In finance, an
investment is a monetary asset purchased with the idea that the asset will provide
income in the future or will be sold at a higher price for a profit” (Investopedia, LLC.,
n.d.). In this project, this definition will be used and focus put on investments that are
made to generate income for the company and to improve its future profitability in one
way or another.
The research on each case was in the form of an interview with a key employee or
employees involved in investment decision making for the company. Detailed
transcripts were generated from each interview. Main points were summarised and
gathered into a table for easy comparison between cases. When all selected cases had

been studied, this summary table was used to draw cross-case conclusions and build the
main and final report for this research project.
As mentioned before, data collection was in the form of interviews (as will be described
in the “collection” chapter). The questions were primarily how and why questions, in
order to retrieve the right data to answer the research questions, to describe the usage
within each case and to compare against the propositions and other reviewed studies.
The following case study method model from Yin’s book has been the guide throughout
this research project (Yin, 2009, p.57).
Picture 1: Case Study Method (Yin, 2009, p.57)
4.2. Propositions
As further described in the Analysis chapter, the strategy for analysis will first and
foremost be a descriptive one, describing the current use of capital budgeting methods
within the selected cases. The relevant main points are drawn together into a table for
easier comparison and the researcher follows up with observations, implications and
discussions of the findings. A formal research based proposition will be introduced in
the conclusion chapter of this report. However, the researcher generated propositions
through the early preparation of this project. Those propositions are based on the
researcher’s personal business experience, his educational experience, and multiple
discussions with various business people, co-workers, friends and family, both in the
past and while preparing this project. In this respect, it is worth mentioning that the
researcher has been active on the Icelandic business market for 17 years in various
sectors (mainly payments), where 10 of those years have been focused on international
business, and 2 of those years his location was in Denmark on behalf of an Icelandic
company.
This proposition generation was also highly recommended through the methods
described in Yin’s book, in order to develop understanding and ask challenging
questions along the way (Yin, 2009, p. 35-39). Although this is exploratory research,
the result of this project will first and foremost be a description of the data and findings
explored, and not based on proving or rejecting the propositions. The propositions are
introduced here as they influence the project in many ways. They have been a driver for
the researcher’s curiosity about this market and may influence many aspects of the
project, such as the selection of cases (large/medium/small) or the interpretation of the
results. These early propositions are evaluated through the discussion chapter and a
final research based proposition is introduced in the conclusion chapter.
Early proposition 1
Icelandic companies do not rely heavily on the use of advanced capital budgeting
methods in their investment decision making. The main reasons behind this are lack of
time, knowledge and resources, instability of the Icelandic market in terms of
forecasting, lack of size of the Icelandic market for calculating/estimating a useful Beta
for calculations, and general cultural behaviour (best captured through the Icelandic
saying: “Þetta reddast”).
Early proposition 2
Icelandic companies use capital budgeting methods in their investment decision making
as much as can be expected for this type of market. Due to the instability of the market
(for forecasting) and its small size(making Beta calculations/estimations difficult), the
use of the most simple capital budgeting tools are most used.
Early proposition 3
Use of capital budgeting is heavily related to the size of companies. Larger companies
have knowledge, resources and investment opportunities to justify use of resources for
advanced capital budgeting methods, in a way similar to that expected in other markets.
Smaller companies rely however on more simple tools due to lack of knowledge,
resources and large investment opportunities. In addition to this it can be expected that
larger companies with healthier volumes are focusing on optimising their operations
and maximising their revenues with smart investments, while smaller and even startup
companies are sometimes faced with investment decisions that are “make or break” for
their companies (not just marginal differences in profits).
These propositions are all related to “how” and “why” companies are using capital
budgeting methods and theories. As the project progressed and more information was
gathered through literature review and discussions, proposition 3 became the dominant
proposition. It could already be seen that the use of capital budgeting methods and
theories was not as high on foreign markets as expected (undermining proposition 1)
and there was a clear usage connection to the size of companies (supporting proposition
3). Therefore, proposition 3 was the main proposition going into the actual data
gathering (interviews) of this research project.
4.3. Prepare
Preparation for the data collection was handled in line with Yin’s minimum requirement
on a case study protocol (Yin, 2009, p. 81). During this research project, the project
researcher personally handled data collection from all selected cases. In that way, it
was ensured that the data collector (researcher) had complete knowledge of the case
study project and relevant readings.
Where possible, personal connections were used to gain access to the relevant people at
each company (case). Where that was not possible, contact was made directly to the
CFO or a closely related person within the company (case). A standard one page
introduction to the research project was provided and a request made for a 1 – 1,5 hour
interview meeting at the case location. The incentive for the company to invest time in
this was a promise to share the results of the project with the case participants.
Minimum requirements for selection of a company interviewee was that they actively
participate in investment decision making within the company and have the knowledge
for answering questions about that process. This participation or knowledge could
include, actual decision making based on pros and cons, or key preparation for such
decision making, e.g. by use of capital budgeting methods and theories.
Both introduction and interviews were performed in Icelandic, where the participant
was Icelandic, but in English for English speaking participants. Transcripts that are

documented from sound recordings, directly after the interviews, were in the same
language as the interview, but the summary table is documented in English (as
translated by the researcher) to create a clear line of evidence within the research
project. Preparation for each data collection interview was a review of the standard case
study questions and an online research on company (case), to prepare discussions and
get additional data on the company.
The data collector (researcher) used an interview script to perform each interview (see
appendix 2). The script started with a note of thanks, a further introduction, ground
rules and allowing for questions on the research project. The script includes several
questions, both key questions and likely follow up questions, which the data collector
(researcher) sought to get answers to (see chapter on questionnaire development below).
The data collector (researcher) asked for permission to sound record the interview to
save time and increase accuracy. In order to increase the likelihood of acceptance for
the recording, the interviewer offered a signed confidentiality statement and a promise
to send the script and summary points to the respondent for review before publishing
any part of the project. All of the company cases were coded with letters (A, B, C, etc.)
throughout the documentation of the gathered data.
The semi-structured case study interviews are expected to be fluid rather than rigid
(adapt to the responses), and during such interviews, it is important to evaluate how
human subjects are likely to respond to the project. There may be some topics/issues of
a sensitive nature, which the respondents will be reluctant to answer, or to even not tell
the truth. There may also be some topics/issues where respondents are likely to
exaggerate in order to look better in the results. It is important to protect the human
subjects and to find the right methods for attaining their cooperation as much as
possible. Examples would be to avoid being judgmental and asking descriptive and
impersonal level 1 questions if the respondent becomes defensive, while asking deeper
and more personal questions if respondent seems to be self-confident and possibly
exaggerating (Yin, 2009, p.73).
4.3.1. Questionnaire development

As recommended by Kvale and Brinkmann, the script for the semi-structured case
interviews (see appendix 2) will be used as a guide, including main topics to be
covered, with suggested questions for each topic (Kvale and Brinkmann, 2009). This
chapter will explain the purpose of the main topics, some of the associated questions
and their connection to the research questions, propositions and literature review.
As with any semi-structured interview it starts with a very open question while focusing
on the topic of the main research question. The purpose here, is to get the respondent to
openly describe the main methodology within this topic, without being guided in any
way by specific questioning. Also, it’s necessary to ensure that there is a common
understanding about what is an investment decision, what kind of investment
opportunities is the company facing and do they have a formal process or are they
following their gut feeling each time?
The second topic concerns goals and statistics. As can be seen from the literature
review it is important to understand the goal of the company when making decisions.
Why are you doing this, and how often do you do this? Here, questions continue to be
kept relatively open (without much guidance). Their focus is on determining driving
factors, such as: Are the decisions “life and death decisions” where marginal differences
don’t matter, or are they carefully finding the best option to marginally improve their
profits? Who is the main driver for the decision, is it the shareholder, the business
manager or the customer/market? In this chapter, the aim is also to find statistics, that
is: how often and what is the result?
The third topic is a dive into the analysis of which methods exactly are used. Specific
methods, how they are used and why, becomes the focus of questioning. A list of
common methods is provided to draw out their usage and/or opinion on them, as well as
preferences and possible hindrances. When asking for hindrances, the idea is to
specifically look for data-shortage hindrances due to the relatively small Icelandic stock
market. This topic is closely related to the main research question.
The fourth topic is searching for knowledge on who is performing the work, what is
their education and experience, are they getting any help, and for how long has the
method been used and developed? Review of the literature has shown a positive
correlation between selection of capital budgeting methods and education, experience,
business sectors (learning from co-workers). This topic tries to explore these factors.
The fifth and the last topic gets more personal and seeks the respondent’s opinion on the
process, the results, on education, support and other such factors. This is simply
another way to view the same concerns, moving away from pure facts and touching on

opinions, culture and personal understanding. However, this must take into
consideration the atmosphere of the interview, willingness of the respondent, if the time
allows, etc.
There is one additional topic chapter with suggested questions if the situation arises
where the case (company) does not use any capital budgeting methods. Those questions
are designed to understand ‘why’? Are there any hindrances, or do they simply not see
any purpose in it?
4.4. Collect
Data collection during this research project was looking for evidence from two different
sources, namely interviews and documentation (Yin, 2009, p.102). The main source of
evidence is through interviews with relevant company (case) employees, targeted
directly on case study topics. The focus of interviews was to get data on internal
procedures and policies, decision-making practises, knowledge and education, and
many other related factors that are not likely to be found through other resources.
Documentation was mainly in the form of online information about the company and its
operations, but also documents provided by interview respondents, government
agencies, or other formal and trustworthy organisation databases. Data collected
through the interviews was recorded in the interview voice record transcript (totalling
80 pages of data, mainly in Icelandic) and in a main points summary (to the extent
possible). Those documents act as the case study database for this research project.
The summary table is an appendix to the research project report and provides a chain of
evidence (Yin, 2009, p.123).
4.5. Analyse
Of the four strategies, which Yin described as guidelines for use through the analysis of
a project, this project will use two of them (Yin, 2009, p.130). The main purpose of the
project is to provide a description or form propositions, on how capital budgeting
methods are used among Icelandic businesses. The reason for using this strategy is that
little is known about current usage and no other research has apparently been conducted
on the subject. Usable and scientific propositions on the subject have not be found.

This creates the need for a description of, and/or propositions regarding the current
usage.
The other strategy is directly related to the use of propositions and testing of those
propositions. As an attempt to honour this strategy (and in line with case study research
methods), the researcher has generated early propositions on the situation based on
market experience, education and conversations with multiple parties. Although these
are early or even experimental propositions, they have influenced the interpretation and
design of this project, as with some of the educated selections made throughout the
project, e.g. in terms of case selections, etc. The results will be compared to those early
propositions and analysed in terms of what was a match and where were differences.
Within the conclusion of this project a final proposition is presented taking all the
aspects of this research project into consideration.
Additionally, the results will be compared to the decision-making theories of March

(see literature review) and efforts made by the researcher to discuss and interpret the
data based on his theoretical framework.
The main analytical technique used is explanation building (Yin, 2009, p.141), where
the data collected is used to generate ideas and propositions for further research. As a
secondary analytical technique, the results are pattern matched (Yin, 2009, p.136) with
the early propositions that were generated around this project. There is also use of a
cross-case synthesis (Yin, 2009, p.156) where results from each case are categorised
(main points selected) and summarised into a table for comparison between cases.
4.6. Share
There are a number of groups (target audience) which may be interested in the results of
this research project. To name a few:
• Icelandic businesses who want to compare their own methods to what others are
doing, and to know how others are using these methods to their benefit. They
may be looking for ways to improve, through simple (or complex)
additions/adaptions.
• Universities, consulting firms and consulting branches of financial companies,

that have the purpose of supporting companies with knowledge and training to

use these methods. They may be looking for ways to improve their support to
this business sector.
• The research community in general, that may be looking for new research
initiatives (additional examples) of how these methods are used in different
international contexts. They may find it interesting to see an Icelandic study, a
qualitative approach, as well as an SME approach to this research. Researchers
could also be seeking ideas for additional research, new propositions to test or to
initiate quantitative research methods.
The main focus of this research report is submission to Reykjavik University where it
serves as a Masters thesis for the researcher, but it is also directed towards businesses
that are looking for ways to improve their own use of capital budgeting methods and
theories.
The project report has been written along the way using a Linear-Analytic structure
(Yin, 2009, p.176). Methodology selection and a literature review were largely written
before data collection started, but improvements were still being made concurrently as
new literature was discovered. The main text of the report will focus on cross case-
analysis but an individual case main point summary can be found in appendix 3, in
order to maintain the chain of evidence.
5. Results
In this chapter, the results from the data collection are presented. The studied cases
where presented in table 1 in the Method - Design chapter before. As the interviews are
the main source of data, this chapter follows the main sections from the interview
questionnaire script. The interviews where recorded and then documented into the
interview voice record transcript (totalling 80 pages of data, mainly in Icelandic). The
main points from the interviews where summarised into a main point summary (see
appendix 3). And finally, this result chapter is written based on the main point
summary, drawing in quotes from the interviews, or highlighting connection to
literature review, where relevant. Other data that may have been collected through
documents, company (case) website, etc. are included in this result chapter as needed,
supporting the same section presentation.

5.1. General understanding and main process

All the cases (companies) are regularly faced with investment decisions. These
decisions are different in form and magnitude, but they are all relevant for the
companies in question. Larger companies had the greatest variety of investment
decisions, ranging from mergers and acquisitions (M&A), to equipment acquisition and
maintenance, research and development (R&D), product development (PD),
information technology (IT) investments, new market penetration, etc. The medium
companies were less focused on M&A, but more focused on equipment acquisition and
maintenance and the long-term operation of the company. These could be termed as
more need-based investments. Small companies were very much focused on needs,
growth and company liquidity around those investments. For them the purchase of raw
materials for productions could be a major decision as it tied down funds for long
periods of time (case G).
There is a significant difference between the groups according to size in terms of the
process to make investment decisions. Of the three large cases; one has detailed
processes that are a part of the company quality system, they are strictly followed and
gatekeepers have been identified to control and decide upon steps in the process (case
E); one has detailed processes and gatekeepers in place, but is a bit more flexible on
how to follow them (more like guidelines) although certain aspects are strictly followed
(level of authority needed to take decisions) (case D); and the third one does not have a
written process, but it has the first signs of gatekeeper roles (branch manager), and
seems to have a very clear and common understanding on how decisions should be
taken and escalated where needed. This level of understanding, clear knowledge
regarding escalation and some sort of gatekeeper roles is what they have in common.
The medium companies do not have a process in place and are much more flexible with
how investment options are discussed back and forth before management takes the final
decision (with or without the involvement of the board). The small companies do not
have a process and most or all investment decisions are made by the top manager. In
both of the small companies, there were special situations that highly affected decision
making, one in which the owner was very disengaged (case F) and the other in which
liquidity controlled everything (case G). Special circumstances and operational
fluctuations were therefore more visible in the small companies than the other two size
categories.

Both the large and the medium companies use a selected set of capital budgeting
calculations to support their investment decision making, while the small companies do
not. The large companies do have a higher level of usage, both in terms of how often,
and how well they are used but this will be covered in more detail in the section on
“which methods, how and why”. The three large companies are all working on an
international market and in many or even most cases, seek input into their calculations
from those foreign markets. The medium companies are focused on Iceland and need to
get their calculation input from the local market, which is limited. This has led to
workarounds/simplifications, and to an extent, unorthodox usage of those calculations
compared to the strict educational theories. Again, this will be covered in more detail in
chapter on “which methods, how and why”.
The large companies are all listed public companies that are traded on open markets.
As with all such companies, fast and reliable information to the market is important and
short term thinking can have a huge impact on stock price and company valuation (e.g.
operations/revenues/profits/investments for this month/quarter/year etc.). The medium
companies are privately owned corporations, both having long-term owners focusing on
the long-term operation of the companies, and not putting pressure on a high rate of
return or short term profits. There was more fluctuation in the ownership structure of
the small companies and difficult to draw a common conclusion in their case.
5.2. Goals and statistics

As previously stated, all of the companies have regular investment decisions to deal
with. The large companies found it more difficult to give a number as they have
divided them into a few categories that have different process and in many cases,
different gatekeepers and managers making the decisions. It was therefore difficult for
one person to have an overview on all of them. The medium companies have a better
overview as management is dealing with most investment decisions, but they are
focusing on the large investments which are few (5-6) every year. The small companies
are still focused on all decisions, large and small, and therefore talk about investment
decisions as very common events.
As can be expected there are many common goals with investments in all of the
companies, such as to grow the volume and the company, to maintain the products and

product lines that they have already built up, to improve those products and product
lines where relevant, etc. These are normal goals for any manufacturing company. But
there were also some differences. The large companies talked about improving
efficiency and to grow or maintain competitive advantage, which they must all have to
some extent, being large and successful companies. The medium companies were very
focused on the long term, invest as needed to ensure the long-term operation and growth
of the companies. But then again, both companies had long-term owners that seem to
have the same focus. This may be a coincidence due to the low number of medium
cases studied. The small companies were also focusing on investments that were
needed to meet customer demand, but they also had a strong focus on the financial
aspect, to be able to finance the investments and to maintain liquidity of the companies.
So, what do capital budgeting calculations do for investment decision making? The
large companies, who in some cases bring many people to the decision process, talk
about the calculations bringing professionalism, neutrality and responsibility into the
discussions. It is easier to discuss and decide on facts and figures, than personal
opinions. The medium companies are on a similar track, mentioning support for
decision making and that calculations influence their decisions. But these companies
have also mentioned that calculations are no more than input into their decision making.
There are many other more practical factors that seem to have a bigger impact on
decision making, such as quality, service, suppliers, safety, etc. Those additional
factors also have a bigger impact on the rejection rate of investment decisions. The
small companies also talked about these additional factors but did not comment on
capital budgeting calculations as they were not using them.
The investment decision time was very flexible for all companies and very much related
to the size and complexity of the investment in question. No conclusions could be
drawn on decision time.
Post investment evaluation of investment decisions was performed by two of the three
large companies, where the result was compared to original plans. This was used for
learning or even to make adjustments where needed. Other companies did not have a
special focus on post evaluation apart from mainly monitoring revenues and costs up to
some level.

5.3. Which methods, how and why?

The discounted cash flow (DCF) formula is the preferred method for the companies
who are using capital budgeting calculations (large and medium cases), especially for
large investment decisions. All of the five cases were using that method, however one
case presented it as a discounted payback period, because it was better to discuss it as
such with non-financial people. A few of them referred to the DCF method as the
generally accepted and standard method and that was why they chose to use it rather
than something else.
The net present value (NPV) and the internal rate of return (IRR) methods were less
used and in some cases, were used more in support to other formulas, in order to double
check the results. However, at least one case used NPV extensively to prioritise
between projects in product development.
Sensitivity analysis was used by three out of five cases. They all used it to consider
multiple options but one used it to create a negotiation framework in M&A situations.
One of the medium companies had newly implemented a new sensitivity model, which
then used DCF and WACC to calculate the results.
The payback period or the discounted payback period, was also used by all of the 5
cases that use capital budgeting methods (large and medium) to some extent. The main
reason given for this use (case D), was that it is easy to centre discussion around it and
explain it to non-financial people. They have a better understanding when an
investment is presented as paying for itself in 1-3 years, rather than discussing the
amount of, for example standard DCF or NPV calculations.
Multiples, such as the EBITDA multiple, are commonly used to valuate companies
when it comes to mergers and acquisitions (M&A). This is especially valid for
companies which are stable and profitable. If that is not the case, then DCF is more
reliable for the valuation. It must also be mentioned that those companies that spoke of
M&A were usually acquiring companies within their industry, and usually have very
good knowledge of the companies in question. They said that often these calculations
just confirmed the valuation that they already knew when they started to evaluate the
investment opportunity.
In all five cases, weighted average cost of capital (WACC) was used to calculate the
discounting percentage to use. Again, this seemed to be what they considered to be the

widely accepted method and at least two of them mentioned Aswath Damodaran when
asked how they were using it. The capital asset model (CAPM) was rarely mentioned.
Four out of the five companies said that they were calculating the WACC for each
investment decision and taking in all the needed inputs based on that investment. One
company calculated the WACC on an annual basis and used it as a minimum
discounting requirement. The large companies are on international markets and are
facing investment opportunities on those markets. They are therefore looking for
information on foreign capital markets and within a foreign banking environment. They
still talked about this being difficult when evaluating investments on emerging markets,
where available information is limited and fluctuations on the market are larger. The
medium companies are working on the Icelandic market. One company was trying to
find relevant inputs to the formula but was having difficulties, and making up for it by
using its own history and accounting information. This input data shortage relates very
much to the description of emerging markets from Andor et al., 2015. Both companies
do not take risk into the WACC calculations. There were two reasons for this
mentioned. One was that the investments where not so large that they felt they were
increasing the risk of the company or that they needed to take on debt, and second was
that instead of taking risk into the discounting, they took it into the sensitivity analysis
and were simply discussing it in decision meetings.
None of the companies said that the owners had any rate of return requirement that
should be used for discounting purposes or as a benchmark for investment decisions.
None of the companies used capital budgeting methods for all decisions. The focus was
on larger investment decisions, but the smaller ones where simply decided without
further calculations or with much simpler versions. For the large and medium
companies, many of the smaller investments were simply included in the companies
budgeting process without specific capital budgeting calculations. Many investment
decisions are accepted based on factors other than price. It may simply be that they
always take this product from a certain supplier, a supplier may have the best and most
reliable service, quality and safety can be big factors, they may want to stick to the same
brand or software throughout the company when adding an additional machine, a
product may be unprofitable but it offers cross selling to other profitable products, etc.
The possibilities are endless, regarding situations where price or capital calculations are
just not important enough for the decision.

The small companies do not use capital budgeting calculation methods and are therefore
out of scope for this chapter. The reason for both (cases F and G) was simply that they
did not have any person within the company with the knowledge to use those
calculations. Both companies however saw possibilities of using it and future plans
were calling for it as well. However, for small companies it can be an investment
decision on its own to decide to invest in this knowledge. In the meantime, investment
decisions are taken by the top manager based on experience, know-how, feeling and
simpler calculations regarding unit cost and price or even simple cash flow generation.
During the interview, all of the case respondents were presented with a short list of
some common capital budgeting formulas, and asked about the usage of those formulas.
A simple statistical summary can be found in appendix 3 showing how the cases used
these formulas. Even with such a small sample, a pattern can be seen, where the large
companies have a slightly higher usage than the medium companies and the small
companies have no usage at all. It is not, on the other hand, a very reliable result with
so few cases for study, and only indicates practice in the interviewed companies.
5.4. Resource and education

In general, the large companies have all the needed resources, knowledge and
experience to make full use of capital budgeting methods in their investment decision
process. It is the management and gatekeepers that are the driving force in improving
the investment decision process as needed. However, the right business economics
education may be lacking in individual position, such as gatekeepers or branch
managers, where a non-financial person may be sitting based on expertise and industry
experience. However, such individuals have the capability to escalate as needed, train
or find other solutions to solve such situations, if it turns out to be a hindrance. In
addition to that, these companies have the resources to seek consultancy when needed,
and they have used such options when faced with some large investments. The large
international audit/consulting companies as well as the investment banks seem to be the
preferred choice. The main purpose is to improve calculation models or to get a second
opinion on a specific case.
Both the medium companies had the needed education and experience in the right
positions to make full use of the capital budgeting methods in their investment decision

process. The management makes final decisions with the involvement of the board
where needed (for largest decisions). It is the management that is the driving force in
improving the investment decision process as needed. In one case, large changes had
been made to the process recently, but in the other case, the process has stayed the same
for a long time. Where the changes were made, an outside consultant was hired to
implement a new calculation model (focusing on sensitivity analysis, and using DCF
and WACC for calculating the results). The learning from this process was significant
and they are using this model as their new standard, at least for larger investments. This
use of consultants however, seemed to be an exception for these two companies that
normally do not use consultants for investment decision help.
Although the small companies have a variety of education and experience, usually
heavily related to the relevant industry, those small companies lacked business
economic knowledge for use of capital budgeting calculations. When questioned, there
was also a low level of knowledge about where to find relevant help on the subject.
Both companies had an idea of where they would start looking, one with his accountant
and the other through his network. Both companies recognised the need to improve
investment decision making and both had upcoming large investment opportunities that
required such improvements. Neither company had used consultants on the subject and
one mentioned that it would probably be too expensive. Both companies were asked if
they had ever had any kind of pressure to use capital budgeting calculations or methods
from outside sources, such as their bank or owners, and both said that had not been the
case.
5.5. Respondent personal opinion and learning

The large companies had opinions and learning points regarding the use of capital
budgeting methods and theories in the business environment. In general, they agreed
that there is a gap between how the theories are taught and intended to be used, versus
how they are actually used. One respondent used simplified versions of presenting and
discussing his calculations in order to be able to discuss this with non-financial people.
In fact, he does not much use the capital budgeting formulas he learned in school, as it
is too distant to non-financial people. One mentioned that the model they are using, has
become too complex, it takes very long to properly use it, and it is prone to mistakes.
Simplification may be needed. And one states that academic education focuses on

formulas, while the reality is all about the input. He misses that training (insight and
understanding regarding input) from newly graduated students.
The large companies also mentioned the importance of their deep knowledge of their
industry and that often these formulas were only confirming valuations that they already
knew through expert industry experience. Thus, the importance of capital budgeting
calculations is not as important in such circumstances. But they also related that to
when companies grow, increased formality and improved processes are needed to work
better together as a team to reach the best investment decisions.
Finally, they mentioned that multiples are heavily used in M&A situations which is not
something that the classroom emphasised. This was also pointed out in Mukhlynina
and Nyborg’s research (Mukhlynina & Nyborg, 2016). Within that same discussion,
the importance of outside consultants was also discussed. The large companies use
consultants but have different opinions about which ones are most reliable. Their
neutrality towards the investment decision must be secured.
The opinion and learning from the medium companies came from different directions.
One talked about the learning experience which they received from hiring an outside
consultant to help them to improve the capital budgeting calculation model that they use
to support investment decisions. It greatly improved their process by implementing
sensitivity analysis and greater use of DCF. They were very happy with the new
process which was going to be their standard for future investments. The other
company talked about the cost of debt in Iceland and how they had always made their
investments without financing it with such expensive debt options.
The small companies also discussed a variety of topics. One talked about the owner
history of the company, where one of the owners had demanded a high amount of
financial reporting and supporting calculations. It got to an extent where the workload
and excessive complexity overwhelmed the company, resulting in conflicts and a
change of ownership. That event did not result in a good experience with formal
financial calculations and reports. The other company talked about the need to improve
the investment decision making process by getting more business economics knowledge
in the form of a CFO. But that was still too big a financial hindrance for the company.
Both companies where looking at future plans that called for improved investment
decision making. They both wanted to make improvements but were not sure how.

6. Discussion
In this chapter I (the researcher) will take a closer look at some elements of the results.
I will link them to theory where relevant, highlight what I find interesting about them
and discuss them from my point of view as the researcher of this project.
The driving factor behind this research project, was that I experienced a gap between
the intended usage level of capital budgeting methods, as suggested and encouraged
through classroom teaching in Reykjavík University, and my 15 years’ experience with
the actual level of usage in the real world. What I have discovered through this research
project, by studying one side of this gap, is that the gap is real. It’s not just my
imagination or my individual experience. First and foremost, it has been supported
through multiple quantitative studies, discovered through the literature review. It was
clearly highlighted through AlKulaib et al study, and even referred to as having long
been a puzzle to the academic community (AlKulaib et al, 2016). My research is a
qualitative study and lacks the quantitative statistical foundation to generalize on the
Icelandic market. However, the cases in my study fit well into the results of the
quantitative studies and can be viewed as an indicator that a similar pattern may be
found in Iceland. Of the studied cases, the small companies don’t use it at all, the
medium companies only apply it to large investment decisions and even though the
large companies are the heavy users, they find it complex, prone to errors and even
make simplifications in order to involve non-financial people. Two of the large
company’s respondents even mentioned and acknowledge the gap when asked about
their personal opinion. What I find very interesting, and in contradiction with my first
proposition, is that this gap is not a specific Icelandic gap but it is an international gap,
as discovered through review of the literature. Those studies show, that it has been a
surprise for many researchers to find that the simpler calculation methods such as
payback period have high levels of usage, and the more complex ones, such as DCF and
NPV, are less used. As stated before, highly educated Icelandic workers are entering
Icelandic companies of all sizes and I would expect those workers to use their
knowledge to implement these methods in their respective workplaces. But such a trend
was not visible through the studied cases and it would be interesting to see if other cases
or a larger sample would deliver different results. Based on the capital budgeting
training provided in Reykjavik University, it would seem that one is supposed to be able
to calculate almost every investment decision situation. But, this high emphasis on

calculations at the university, fails to identify that there are often many important
factors to a decision that are difficult or impossible to calculate. To mention a few of
them again, they can be, quality, service, safety, etc. Many of these factors are critical
to a decision long before any calculations are started. Since the gap is real on an
international level, and has been known to the academic community for some time, it
may very well be that there is no simple solution to it. But based on this qualitative
research the small companies are interested in cheap and quick knowledge solutions to
get up to speed on this topic which could be of interest to both universities and
consulting companies.
Within the studied cases of this research project there was a clear difference in the usage
of capital budgeting methods for different sizes of companies. This fits into the results
of other studies (covered in literature review) and indicates that a similar size pattern
may be found on the Icelandic market, even though this qualitative study cannot
confirm that with statistics. But being a qualitative study, looking at the different usage
of large, medium and small companies, there seems to be a learning curve regarding the
use of those methods. The small companies do not focus on it. They have a short and
simple decision process where the top manager makes most decisions based on
experience, they have bigger priorities in their operations than doing the correct
discounting of investment decisions, and their financial situation does not always allow
for the needed knowledge. In many ways, the small companies fit well into the first
decision category of March’s decision theories (March, 1991). The medium companies
have the needed knowledge and they use it up to a point which they judge as relevant.
They choose not to be too formal or inflexible, or do not see the purpose or need. As
companies grow, the pressure from owners grows, as well as the need to have clear and
well defined processes for groups of people to work together. It is also a good method
to delegate responsibility of decision making and empowering more people such as
defined gatekeepers in a process. Thus, it can be seen that the usage of a formal
investment decision process as well as the use of capital budgeting methods grows with
the size of companies. I can detect three major influencing factors, that are highly
connected to each other. One is the size of the company, the complexity of it, the
number of people involved in the decision making, the need to delegate work (decision
making) and requirements from owners. Two is the knowledge level within the
company. And three is resources, or available funds to invest in knowledge or extra
people (time) to focus on the subject. This is the investment decision learning curve

that I read out of this project. It also means that capital budgeting methods and theories
are often not visible until they are more formalised within a large company. You can be
associated with a medium-sized company without realising that capital budgeting
calculations are used, because their use may be confined to a relatively closed group of
top managers. This may affect and widen the perceived gap between reality and theory.
It is worth mentioning a certain aspect of my results, that did not fit well with the results
of the comparative studies described through literature review. In those studies,
payback period was consistently the most used capital budgeting method, while DCF
was more used by the largest companies. In my research DCF was the most used
method, even with the medium sized companies, who even referred to it as the
recognised standard capital budgeting method to use, when asked why they used it
instead of something else. This may very well be a coincident due to the small sample
of my qualitative research, but it is worth mentioning as it does not fit into the general
pattern.
This was however, not only a question about which companies used capital budgeting
methods and which formulas specifically. This was also a question about how do they
use those formulas, and is there anything specific about Iceland that supports that usage
pattern. The most interesting usage pattern was regarding the WACC formula. Two of
the large companies (cases A and E) were calculating it for each investment decision
getting input from foreign markets, using industry knowledge, foreign stock exchange
markets and bank industry information. This is what I would expect and consider as
normal usage. One case (case A) still talked about difficulties in getting input when
working with Icelandic investments, or when dealing with the difference of an official
Icelandic company WACC, which is rather high, and individual investment decision
WACC in relation to a foreign investment where the calculated WACC could be very
low. Difference in interest rates played a big part here, and investment rate-of-return
needed regular discussion in board meetings. One of the large cases (case D) did not
calculate WACC for each investment and simply used it as a minimum discounting
percentage requirement, where gatekeepers could add on top of the discounting, just to
be on the safe side, and in order to keep it simple. This would indicate that all
investments are financed in the same way, they are all equally risky and that they have
no effect on the overall risk of the company in the eyes of owners. This may very well
be the case, but it is not in line with the strict theory of Reykjavik University classroom

education. Next are the medium companies working on the Icelandic market. They do
calculate WACC for each large investment decision, but they don’t finance it with debt
(both companies having close to 0% debt to equity ratio) and they don’t calculate risk
into the discounting percentage. Risk is simply discussed in decision meetings or even
taken into consideration in sensitivity analysis but not calculated as part of the cash flow
discounting criteria. Again, this is not in line with educational theories. One case (case
C) talked about how expensive it was to finance investments with debt, especially in
Iceland. This may be the case, but the educational theory suggests that debt is cheaper
financing than equity, and therefore companies take on debt. But as the debt to equity
ratio grows the company gets financially riskier and equity owners want higher returns.
This ends up in a balance, with the correct debt to equity ratio, which give the lowest
Weighted Average Cost of Capital (WACC). The owners of case C are long term
owners that do not demand a specific rate of return, which makes it difficult to compare
the cost of equity and the cost of debt. But this is still an interesting statement and
example. It relates to the results from Andor et al., 2015, were the top executives are
mostly concerned with the long-term performance (stability) and solvency (liquidity) of
their firms instead of maximisation of shareholder wealth. All these examples indicate
differences between reality and classroom education and underline the aforementioned
gap between the two. All of these example companies where happy with their current
use of capital budgeting methods and said that it was working well for the company.
But it raises the question, would it be worth the efforts for these companies to go the
extra mile to follow the classroom theories, or should the educational sector relax on
their requirements? Or is there a balance somewhere in-between?
But what is the actual role of a formal investment decision process and supporting
capital budgeting calculations? What are its effects on actual decision making
according to the theories of March? Based on the results, these methods are bringing
professionalism, neutrality and responsibility into the process. It is easier to discuss and
decide on the basis of facts and figures, than personal opinions. In other words, it is
bringing appropriate behaviour and rules into the decision-making process. It can
therefore be argued that these methods are moving the decision process from categories
1 and 3, into category 2, according to the decision-making theories of March. That is,
decisions as rule-based actions.

Looking at the early propositions, it is clear that only one of them holds any water. The
first one assumes that Iceland is culturally different from other markets and that its use
of capital budgeting methods is therefore different. The results from the studied cases
in this research fit well into the results from other studies and indicate that Iceland may
very well be similar in many ways to other countries, such as supported by Brounen et
a.l, 2004, where the size of companies is the biggest usage factor. The so-called
instability of the market including the lack of input data, is also comparable to other
emerging markets. The second proposition only states that Iceland is a small emerging
market and capital budgeting usage is in line with expectations for such a market. The
result indicates that there is nothing wrong with that per se, but the proposition does not
give a good description of the actual usage, or clarify anything in particular. The third
proposition is the one closest to the indicated reality as it specifically states the effects
on usage by different sizes of companies. However, it states that smaller companies use
simpler tools which is not the case within the studied companies as DCF was the most
used tools of medium companies as well. But it was more a question of how often is it
used and how well (for example regarding correct usage of discounting). It also has a
statement regarding the main goal of investment decisions within different companies
which may be relevant regarding large and small companies but is too specific to be
accurate. This last proposition was formed after an early discussion regarding the
different goals of investments for different companies. That discussion is where the
idea came from, that it was likely that the size of companies was an important usage
factor. This was before starting the literature review where the size effect became very
clear as an international pattern. A new proposition based on the results of this project
is put forward in the conclusion chapter.
The large companies mentioned that capital budgeting calculations where often just
confirming the valuation of an investment option, which they already knew because of
their expert knowledge on the industry and the relevant market. This is an interesting
point and relates to the decision to exclude the financial sector when choosing cases for
this research project. The finance sector was excluded because they were foreseen as
experts who would use these formulas the most, and derive income by consulting with
others using that knowledge, at least to some extent. One of the case responders (case
D) also mentioned that you would have to go to the banks to find people that use their
capital budgeting education to its full extent. But why is this? Why does the finance
industry find more use in capital budgeting methods and theories than large

manufacturing companies that are doing M&A within their industries? Why do they
feel more need to be accurate about the risk and discount evaluation than industry
experts, if that is really the case? For one, there is of course a greater concentration of
business economics experts with the relevant education within the financial sector than
most other sectors. But it would be interesting to know if deep industry knowledge
plays a part here. That is, if industry experts don’t need the same amount of
calculations to support investment decisions within their industry, as that needed, for
example, by investment bankers who may be investing across several industries without
deep knowledge in any of those industries. Most likely this is an over simplification but
it may nevertheless be a contributing factor.
7. Conclusion
There are a few things that can be concluded from this research. This research, being a
qualitative research, digs a little deeper into the how and why than other research
projects that were studied on this subject. And even though it is a qualitative study, it
still attempts to fit into the statistical framework of some of the other quantitative
researches, showing similar company size effect on the use of capital budgeting
methods. In this chapter, the research questions will be re-visited to summarise the
answer to them, a new proposition will be introduced on the usage of capital budgeting
methods and theories within Icelandic businesses, and thoughts put into which further
research initiatives could follow this research project.
7.1. The research questions

The main research question is: How and why do Icelandic companies, regularly faced
with investment decisions, use capital budgeting methods and theories to support their
investment decision making?
Based on the studied cases, small companies do not seem to focus on these methods and
theories at all. This could be an overstatement due to a small sample. If one of the
cases would have had a principal manager with business economics education the result
could have been very different. But in general, low usage of these methods by small
companies fits well into the results of the quantitative research projects studied, which
supports a possible conclusion that the capital budgeting usage by small companies in

Iceland would remain very low, even if more cases were included. The reason for the
lack of usage within the studied cases, is that there are few resources within these
companies and the decision process is simple and often concentrated in one manager.
Investment decisions that may seem small for large companies (even too small for a
formal decision process) are often big decisions for small companies, and often there
are factors other than cost, price or the DCF that control decision making (such as
service, quality, operations, demand, etc.).
Again, based on the studied cases, medium companies are using selected capital
budgeting methods to support their larger investment decisions. There is still not a very
structured investment decision process in place as decision making is still manageable
within the hands of relatively few managers. The reason why, is that investments have
become relatively big and often long term, and at that point capital budgeting methods
and theories become more relevant. Ownership structure, ownership rate-of-return
requirements, and target market (Iceland vs. international) may have a significant effect
on the actual calculation usage method and inputs into the formulas. Many companies
may have developed workarounds and simplifications from the way capital budgeting
formulas are intended to be used as presented in the classroom. It can be expected then,
that within medium companies, the greatest variety in the use of capital budgeting
methods and theories can be found.
Based on the studied cases, large companies are very likely to be actively using capital
budgeting methods and theories. They are also likely to have a more formal investment
decision process where more people (other than upper management) have been involved
and made part of the process. They are using these methods to increase the
professionalism and responsibility in the decision process as well as to bring neutrality
into the discussions that are often needed within groups of people to reach a decision. It
is easier to discuss and decide on facts and figures, than personal opinions.
The first sub-questions is: What is the current main usage (if any usage at all)?
The DCF method seems to be the most respected and used method. A few respondents
referred to it as the standard or the industry recognised method.
NPV is also used, but it is more common in order to prioritise between development
projects where there where many of them, and/or to support other methods such as DCF
(double-checking).
WACC is the most used method to calculate the discount rate for use in the DCF or
NPV formulas, but there are differences in how it is used. Most calculate it for each

investment but one uses it as a yearly minimum discount percentage. Those who work
on international markets find their input data from those markets, while Iceland focused
companies look in their internal records or use workarounds/simplifications to make it
work for them.
IRR is more used as a supporting secondary method, for example to double check the
outcome of the WACC calculations.
Sensitivity analyses are used to study different options or to create a negotiating
framework.
Payback period, or discounted payback period is also used, specifically in situation
where non-financial people need to be involved in the process.
Multiples, such as the EBITDA multiple, are popular in connection with M&A
investment decisions, and then usually in cooperation with industry benchmarks. It can
be very useful where M&A business oportunities have profitable and stable operations.
The second sub-question is: What affects the use of capital budgeting methods (method
complexity, educational level of staff, company size, company industry, actual and
perceived barriers, etc.)?
The biggest effect on the use of capital budgeting seems to be related to the size of
companies. That was discovered already through the literature review and designed
specifically into this research by selecting cases from those three size categories to
study the differences. The size effect on usage is clearly explained in the conclusion to
the main research question.
The education level effect is also visible in the studied cases, but mainly through the
small companies. There the capital budgeting methods and theories are not used, and
lack of appropriate knowledge was named as the main reason. Both companies where
looking to improve the situation by securing resources with the right
education/knowledge. This is in alignment with educational effects as described by
Barjaktarovic et al., 2016.
Ownership structure and access to input data did not affect whether the calculations
were used or not, but rather how they were used. Lack of input data and rate-of-return
requirements made companies create workarounds/simplifications in their usage of the
WACC formula as an example.
Complexity of capital budgeting methods does not seem to have the expected usage
effect. Through the literature review, methods such as DCF, NPV and WACC were
categorised as “more sophisticated” methods and should therefore have less usage. In

this research these same methods were the preferred methods with the greatest usage.
The effect of industry was not tested as this research project was completed within one
industry (manufacturing) in order to limit case variances (as explained in the method
chapter).
Companies where asked about barriers for usage, and especially if the barriers related to
the Icelandic market. This did not deliver a concrete result, but two companies
mentioned the difficulties of finding input data for calculation formulas on Iceland and
emerging markets. However, this lack of data did not seem to stop the companies in
using the formulas, they simply searched harder or found workarounds/simplifications
regarding the usage of the formulas.
The third sub-question is: Is there room for usage improvement (and how)?
One of the results of this project, is that there is a gap between the intended use of
capital budgeting methods (from an educational point of view) and actual use of those
same theories. The large company cases studied, are closest to applying the methods as
intended, medium companies use them for large decisions and there is little or no usage
within small companies. Additionally, within all company sizes, many investment
decisions are taken without ever doing the calculations, simply because other decision
factors overrule. An important question here is: What is the correct usage? Is the
intended usage in academia too strict and distant from reality, or should the actual usage
be improved and moved closer to the intended use? One of the case responders (Case
D) said: “…it’s good to get an education, a bigger background. A part of learning in a
professional career is to be able to take the step from theory to practice. It’s better to
be over-prepared than under prepared.” Another case responder (case A) said that
newly graduated students where too focused on correct usage of the formulas and
lacked training in evaluating and checking the validity of the input. There are a few
points in this that may be considered as improvement opportunities. On the educational
side, there are many strong points, and there is much truth in what the responder from
case D says, that you need a bigger background, and that it’s better to be over-prepared
than underprepared. However, higher education could put more emphasis on actual
examples, include internship as part of the degree, or simply put more focus on the
input (making students find the input from both mature and emerging markets) instead
of feeding the input and putting too much focus on the formulas. There is also a
question if the schools are focusing too much on American textbooks and on developed
markets in their education? An idea could be to study literature such as the Doctoral

Dissertation of Chandra Prakash Gupta, which writes about Capital Budgeting

Decisions Under Fuzzy Environment (Gupta, Chandra P., 1996).
There is also potential to improve the usage of the WACC formula on the market.
Three out of the four smallest companies in the research (two medium and two small)
where trying to make their investments without using debt because it is so expensive.
That statement contradicts the fundamental nature of WACC which assumes that a
company starts with “expensive” equity financing, and then calculates how much
“cheap” debt you can add, until you have reached a debt to equity ratio equilibrium
where you get the lowest weighted average cost of capital. The main takeaway here is
that due to risk, the cost of equity is higher than cost of debt, and the cost of equity rises
as the risk rises (with higher debt to equity ratio). The four companies did not take risk
into their calculations (in some cases due to lack of input data) and may therefore
evaluate their current cost of equity too low. Of course, there could also be something
special with the Icelandic market which creates this special condition. And then there
was one case (case D) which used a yearly WACC as a minimum discount percentage
for every investment, usually using a higher percentage rate. The risk here is to reject
good and profitable projects by setting the discount rate too high. The only situation
where this would work is where you have so many similar profitable projects that you
can’t do all of them and you are simply using a simple rate to find and prioritise those
with the highest profitability.
Finally there is a question about whether there is a good way to help the small
companies to implement and start using some simple versions of capital budgeting
methods without involving too much time or straining their limited resources. Both the
small companies wanted to improve but did not know how or did not have the financial
strength to do it. Here the schools could offer short courses, and the consulting industry
could help with some simple and cheap package solutions. For an example, a fixed
price, simple input model, with one hour teaching/training included. This is something
that would be low-priced and easy to apply within those companies. This sort of
module could also be a good introductory investment for consulting companies, as
many of these small companies will grow and need further consulting in the future. So
this is, in fact, a potential investment decision for the consulting companies!
The fourth and the last sub-question is: Is there a noticeable difference from the usage
in other countries?

No, there is not a great difference, based on the studied cases. Just like in the other
research projects that were studied, the size of companies is the factor that most affects
the use of capital budgeting methods to support investment decisions. This has already
been described in detail in the answer to the main research question. Another similarity
is that Iceland (as a capital market) shows many of the same characteristics as described
from emerging capital markets. There is lack of stability and availability of input
information for capital budgeting calculations is also lacking. The only difference that
can be seen is that the usage of sophisticated capital budgeting formulas (such as DCF,
NPV and WACC) seems to be higher here than on other markets, but the size of the
sample in this research is not big enough to give a trustworthy statistical result.
7.2. The Final proposition

This project has been a learning experience. From the original driving questions,
through the early discussions and propositions, through the literature review and
through the actual data gathering and analysis. The early propositions were not correct,
but at least one of them pointed in the right direction. The following is the final
proposition about capital budgeting usage to support investment decision making on the
Icelandic market. It is formed after reviewing and contemplating the results of this
project.
Iceland is a small emerging capital market and acts in many ways like other such
markets. The use of capital budgeting methods and theories is heavily related to the
size of companies. Larger companies have knowledge, resources and investment
opportunities to justify resource usage for advanced capital budgeting methods, and do
that in a similar way as to that which can be expected in other markets. They also have
the need to delegate authority in decision making, which again calls for good
investment processes around that delegation and around the effective cooperation of
large groups of people. Smaller companies may well have the right knowledge in place
but not the same need for delegation and formal processes. The smallest companies
usually do not focus on such calculations, as decisions are generally taken by top-level
managers based on feeling, experience and practical operational reasons. Lack of
reliable input information for capital budgeting calculations, on emerging markets such
as Iceland, may result in simplifications and workarounds in the usage of formulas.

Ownership structure and requirements regarding rate-of-return are also an important

influential factor on usage.
This proposition is based on a qualitative research that has a close fit to multiple
comparable quantitative studies and should therefore be a fairly good description of the
usage of capital budgeting methods and theories to support investment decision making
on the Icelandic market. This is a proposition that can be validated and tested through
future research.
7.3. Further research

This case study research format can be highly recommended. By combining the
literature review and doing a qualitative study on a limited number of cases, it has been
possible to learn much, and draw conclusions on general behaviour in Iceland. It would
however be very interesting to see someone repeat this research with new cases and
possibly a new industry, such as service companies, or even across industries, to test the
reliability of this research and improve it where possible. Following this research, there
exists a research supported proposition on the capital budgeting behaviour of the market
and it would also be interesting to see someone test that proposition, as well as the
limited statistical results of this research, with a quantitative research on the Icelandic
market.
One of the challenges of this research was to limit it to a specific area that was
manageable for the scope of this research. There were additional topics that would have
been interesting to study as well. And along the way, new questions have been raised,
that can justify additional research. A few of them will be named here.
As stated before, this research is driven by a perceived gap that the researcher
experienced between the higher education at Reykjavik University and the business
environment. The research is designed around studying one end of that gap, the
business environment. It has basically taken for granted that capital budgeting
education is similar across universities. This is based on discussions and informal
observation including the texts used in classrooms. However, this can be a topic for
further research into higher education practices. Is capital budgeting education similar
across universities? Are they using the same books, referring to theories from the same
experts, and focusing on the same markets? Are universities using different approaches

to education, and if so, which one is the best, and why? Which approach is the closest
to actual business requirements, and are the requirements different between emerging
and developed markets?
Consultants have also been mentioned during this research. Those most often
mentioned are the big international auditing and consulting companies and the
consulting branches of both the investment and financial banks. But there are many
consultant firms, large and small, with both broad and specialised services. What are
they offering to the market in terms of investment decision assistance and capital
budgeting methods and theory support? Where should businesses be looking for help
and why? How can consulting companies improve their services to the market?
In this research, there have been highlighted some cases where the WACC formula is
used in an unorthodox way. The following issues were raised: no use of risk (and/or
lack of input such as beta), no clear debt to equity ratio or a goal of such, cost of equity
not known, no clear rate of return demand from owners, etc. For those wanting to dig
deeper into the usage of the WACC formula, it could prove useful to look at issues such
as: variances of usage and the outcome effects of such variances, input availability in
general, input availability on emerging markets, etc. In general, how easy or complex is
it to use the WACC formula in the real world?
One of the points raised during this research is whether industry experts have the same
need for capital budgeting methods and theories when making investment decisions
within their respective industries. It has been stated that often it only confirms what
was already known regarding the investment valuation. The financial industry,
however, is most likely to use the theories the most. The question here is whether that
high usage can be explained as due to lack of expert knowledge on individual industries
(because they may be investing across industries without deep knowledge of them).
This could be a research topic on its own: Can expert industry knowledge, lessen the
need for capital budgeting methods or even replace it completely?
The last research topic that will be mentioned here is potentially the most interesting. Is
there a financial gain to be had using capital budgeting methods and theories? That is,
if you would compare a similar group of companies where the companies in group A
actively used capital budgeting methods and theories to support their investment
decisions, and the companies in group B did not, basing their investment decisions on
gut feeling, experience and other factors. Would it be possible to measure a financial
difference between these two groups? Does one group make better decisions, get a
higher margin, or more profits than the other one? Based on this research it would
probably be best to conduct such research on medium sized companies, as the most
variety in the use of capital budgeting methods and theories is likely to be found in that
group.

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Appendix 1 – Corporate finance tools overview
(Brealey, Myers and Allen, 2014)

Appendix 2 – Script for conducting interviews
Procedure of interview:
1. Personal presentation and give thanks for the opportunity to conduct this
interview.
2. High level intro on research project, in line with one page introduction sent out.
3. Preparation - Ground rules and method for the interview – Get acceptance
a. The interview will be recorded. For researcher only.
i. A written transcript will be sent for review. Also accessible by

project supervisor.
ii. Hand out a signed confidentiality statement.
iii. Promise full confidentiality and name protection.
iv. Respondent can also get a copy of the research project final draft
for review if he so wishes.
b. Standard questions according to a script (plus needed follow up

questions)
c. Expected time to be 1-2 hours
d. After the interview, a written transcript will be sent for review.
4. Allow for questions on project or method.
5. Before we start, can you give me a short high-level intro (elevator speech) on
what the company does, its location, size, etc.
6. Conduct interview (go through questions)
7. Give thanks, allow for questions and repeat next steps.

Questions (which will be asked in Icelandic):
Start very open and then dig deeper with Why questions
1. Understanding and main process
a. How do you define an investment decision?
b. What would be typical opportunities within your company to undergo

“formal” investment decision making?
i. Is there a minimum requirement for activating the “process” (e.g.

amount, time, resources, etc.)
c. How does your company go about investment decisions and the use of
capital budgeting methods & theories?
i. How does your company evaluate a business case
ii. Does your company use calculations to support decision-making?
1. If so, which value do those calculations bring to the

process? (How does this usage/process help your
company?)
2. Who is the driving/benefiting stakeholder of those

calculations? (e.g. division, manager, owner, other?)
iii. Are there written and clear policies/processes regarding decision

making?
d. What is the current main usage on capital budgeting methods and

theories (if any usage at all)?
2. Goals and statistics
a. How regular are investment decisions made within your company?
i. What is the main goal/driver for such decisions (e.g. marginal

improvements, operational issues, new opportunities, make or
break situations, etc.)
b. How long is the process (e.g. the calculation process; decision process)

c. What is the main goal with financial investments?
i. Maximise shareholders wealth / long term operational security /

quick cash flow / liquidity (life or death) / etc.)
d. Do you measure the success of the investment (and if so: How)?
i. Do you track the results (e.g. return on invested capital?)
ii. Comparison with original plan / business plan / budget?
e. Is there any specific stakeholder that pressures for the use of capital
budgeting tools in decision making (e.g. sharholders / management /
divisions / PM’s / authorities / other 3rd parties / etc.
f. How often do you reject investment opportunities based on capital

budgeting calculation results?
3. Which methods, how and why?
a. Which specific capital budgeting methods do you use to support decision

making with calculations?
i. Why?
b. Which specific capital budgeting methods do you use to calculate your

cost of capital and/or your discount rate for investment evaluation?
i. Why?
ii. Do you calculate that on regular basis?
iii. Do you have a goal for cost of capital (and debt ratio)?
iv. When discounting, which method do you use, and do you adjust
it based on risk?
c. Are there any specific reasons or hindrances that guide/force you to use
those methods instead of some other?
d. Please look at a list of popular capital budgeting methods and mark

down/or tell me if you know these methods and how much you are using
them, if any (hand over the list from appendix X).

i. Are there additional methods (not of the list) that you are using?
ii. Are there any methods on the list that you would like to use more
than you do?
iii. Are there any methods on the list that you don’t want to use, or
you cannot use, due to some hindrances?
e. Are there any specific opportunities, challenges or hindrances of

evaluating and taking investment decisions in an Icelandic business
environment?
4. Resource and education
a. Who within your company is responsible for investment decision

making?
i. Are there other important stakeholders?
ii. What is their average educational level
iii. What is there average experience (e.g. time within the company
or industry)
b. Who within your company is responsible for supporting investment

decision making using capital budgeting methods and theories?
i. Are there other important contributors / participants /

stakeholders?
ii. What is their average educational level
iii. What is there average experience (e.g. time within the company
or industry)
c. Do the aforementioned resources get outside help or support in their

work?
i. Consultants
ii. Investment professionals (bankers)?
iii. Education?

iv. Other?
d. How long have you used your current investment decision method?
i. Has it changed through time? And if so, why? Have you

experienced improved results?
ii. Is the result of improved and calculated decision making, worth

the effort?
5. Respondent personal opinion and learning
a. Are you happy with your company’s current use of capital budgeting
methods to support your investment decisions?
b. Do you believe your company has benefited from that calculation use?
…do you remember any examples?
c. Would you like to do something differently, from how it is done today?
d. Do you know where to find relevant education, training and/or

consulting help regarding the use of those methods, if needed?
i. What would be your preferred choice?
e. Do you believe that Iceland poses any specific opportunities, challenges

or hindrances regarding this investment evaluation process in general?
6. In case of little or no use of capital budgeting methods
a. Are you familiar with capital budgeting methods (e.g. those mentioned in
topic 3)?
b. Is there any specific reason for not using the aforementioned methods?
c. Do you believe that your company could benefit from some use of those
methods?
d. Do you know where to find relevant education and/or training in the use
of those methods if needed?
7. Make sure to have background info on respondent: Name, position, years at

company, education and other relevant information.

Methods for evaluating investment options
Method Use always Use often Use sometimes Use rarely Never use Don’t know it
Net Present Value (NPV)
Discounted Cash Flow (DCF)
Adjusted Present Value (APV)
Internal Rate of Return (IRR)
Payback period, discounted Payback
or break-even point
Rate of return
Profitability index
Decision trees or sensitivity analysis
Other

Methods for evaluating cost of capital / discount rate
Capital Asset Pricing Model
(CAPM)
Weighted Average Cost of Capital
(WACC)
Other
I don’t calculate but directly use the
required rate of return from
stakeholder, e.g.:
- Cost of equity
- Cost of debt
- Other

Appendix 3 – Interview summary tables
General understanding and main process?

A D E Conclusions Large
Investment decisions are mainly of two There are many types of investments, that There are many types of investments, that Multiple types of investment decisions
types. One is maintenance, renewals fall under different processes. E.g. fall under different processes which (large and small) following different
(or CAPEX) to maintain the company Buildings, Equipment, R&D, IT, etc. are a part of companies quality processes (documented or not)
operations, mostly approved through Most investments are accepted through 5 system. E.g. M&A, R&D, PD, There is some sort of process in place:
budget. The other is regarding large year plan (mostly including M&O, etc. - Documented and followed
new projects, e.g. new machines, new replacement investments) and then Most investments are part of and - Documented and partly followed
markets, M&A, etc. resubmitted for approval before accepted through a 5 quarter rolling - Undocumented but understood and
The investment process is not engaging to the commitment. There is forecast but there is also a process for certain steps followed
documented, but still follows a certain also a process for investment investment opportunities outside of Hierarchy linking relevant authority to
plan, where branches involve top opportunities outside of the 5 years that plan. relevant decision making is clear
Large management in larger investments, or plan. Investment processes are well (documented or not)
vice versa. Investment processes are documented but documented and followed Selected set of capital budgeting
companies
There is a hierarchy linking authority to act more as a guideline (not strictly There is a known hierarchy linking the calculations is used.
relevant decision making but it is not followed). correct authority to relevant decision Delegation of authority and workload is
documented and based on feeling. There is a known hierarchy linking the making. The authority gatekeepers are common through the role of
Very deep knowledge on the market correct authority to relevant decision driving the improvements of the gatekeepers (connected to formal
within company and specifically HQ. making, which is strictly followed. process. processes).
Often there is internal consulting The authority gatekeepers are driving Selected set of capital budgeting The companies are public companies
involved. the improvements of the process. calculations is used.
Selected set of capital budgeting Selected set of capital budgeting The company is a public company
calculations is used. calculations is used.
The company is a public company The company is a public company

B C Conclusions Medium
Formal investments decisions are mainly in Investments are mainly in machines Investments decisions are more in line of
machines (new or renewal) and other (new or renewal), but also housing, machines and equipment but less on
that are large enough to raise questions car and IT decisions, etc. other companies.
on repayment, financing, etc. There is no formal investment decision The investment decision process in not
There is no formal investment decision process. Management lead decision documented but seems to be
process. Management lead decision process. The invested amount formulated and known.
Medium process. The invested amount controls controls the level of authority but is The invested amount controls the level
the level of authority but is not formal not formal (based on feeling) of authority needed but it is not
companies
(based on feeling) Selected set of capital budgeting formal (based on feeling)
Long term strategic plan helps with calculations is used. Selected set of capital budgeting
decision making as well as 5 year Company is a corporation owned by few calculations is used.
investment plan individual long-term owners, Companies in corporate ownership
Selected set of capital budgeting including management. structure with long-term owners and
calculations is used. long-term operation focus.
Company is a corporation owned by same
investor for decades
F G Conclusions Small
Investment decisions are based on need. Investment decisions are: new and Investment decisions are based on need
Primarily renewal or improvements improved products, bulk raw and growth opportunities where
within production line. materials, etc. possible.
No formal decision process. Director takes No formal decision process. Special situations are affecting decision
most decisions based on industry Owner/manager takes most decisions making (more fluctuation), e.g.
experience and know how. solely based on feeling, experience ownership status and liquidity issues.
Small No capital budgeting calculations, but and demand. No formal investment decision process.
some basic calculations nonetheless No capital budgeting calculations, but Top manager governs based on
companies
Ownership structure and history highly some basic calculations nonetheless feeling and experience.
influence current situation and Demand, financing, liquidity and margin No capital budgeting calculation
behaviour. Build up and interest before per unit are main drivers methods used
Iceland financial crash, but little or no Owners and managers, more or less the Variety in ownership status
interest or interference from owner same group (1 outside investor with
after that. No board meeting held for low and informal decision
last 8 years and no rate of return involvement). No rate of return
demand on investments. demand on investments.

Goals and statistics?

Investment decisions are regular, 2-3 per. investment decisions are regular on all Investment decisions are regular on all Investment decisions are regular
month. decision type levels decision type levels. Goals are normally: growth, improving
Goals are normally: growth, improving Goals are normally: growth, improving Goals are normally: growth, improving efficiency/profit, maintenance or
efficiency/profit, maintenance or efficiency/profit, maintenance or efficiency/profit, maintenance or competitive advantage.
competitive advantage. competitive advantage. competitive advantage. In general, to Capital budgeting calculations bring
Goal of the process is to sanity check the The process and calculations get branch grow revenue faster than cost. professionality, neutrality and
plan of the branch and make sure they managers to put more thought/quality Calculations bring professionality, responsibility into the discussions for
can be independent in into it. Calculations bring neutrality and subjective discussions investment decision making.
handling/financing it. It also professionality, neutrality and to the table. Decision time is very flexible, tied to
Large increases professionality and subjective discussions to the table. Decision time can range from 2 months case-by-case basis.
responsibility at the branch level. Decision time can range from 4 weeks to to a year. Post investment evaluation is more
companies
Decision time can be very flexible, 6 months (dependent on branch There is a formal evaluation step in the common than not.
dependant on cases. maturity) M&A process, 1-3 years after. Investment decisions are often rejected,
Use of calculation methods is very There is no formal evaluation step Tracking EBITDA and comparing to but mostly on more practical reasons
connected to the size and goal of it. Projects are more often rejected on other acquisition business case. than pure capital budgeting
Less calculations for standard reasons than pure calculations Projects are more often rejected for other calculations.
CAPEX investments but more on reasons than only valuation.
bigger and more complex deals
Investments are evaluated afterwards and
compared to original plans
Projects are rejected but not necessarily
on calculation reasons.

Formal investment decisions are a few Formal investment decision are less than Formal investment decisions are a few
every year. Not every month. 5 per year. every year (approx. bi-monthly)
Goal is always to ensure the long-term Goal is to grow business, maintain or Goal is to grow business, maintain or
operation of the business (not just improve product line, increase improve product line, increase
short-term profit). But also to grow automatization, but maintain a very automatization. In general to ensure
business, maintain or improve product low debt ratio (close to 0). the long-term operation and growth of
line, increase automatization Calculation role (DCF) is to support and the business.
Decision time is very flexible, from influence decision but not to accept or Role of calculations is to support and
weeks on smaller investments, up to a reject it. Results are used to adjust influence decisions and to priorities
Medium year (or more) for large investments. factors such as price and cost in the projects.
companies New model helpful for prioritisation and business case to make it profitable. Decision time is very flexible, tied to
at least on clear sample of prioritising Decision time ranges from 3-12 months case-by-case basis.
a growth project in front of cost Investment decision are evaluated up to a There is not much focus on post
saving project. level, e.g. to see if machines are investment evaluation. One company
There is no formal evaluation step. performing as expected, cost, monitored cost and revenues but the
It does happen that investment ideas are revenue, etc. other put no effort into that.
rejected due to calculations, but more Investments are never rejected based on Investment decisions are often rejected,
often on other factors. calculations, only fine-tuned. but mostly on more practical reasons
than pure capital budgeting
calculations.
Number of investments based on need, Investment decisions are regular, from a Investment decisions are common for
exact number not known. few pr. week down to monthly. small companies, (lower definition
Goal is to maintain or improve product The goal is to grow product line, meet threshold).
line, but maintain a very low debt demand and maintain liquidity Goal is to maintain and grow the product
ratio (close to 0). Decision time on largest decisions can line, meet demand, and being able to
Small Decision time on larger decisions can range from 3-12 months. finance those investments.
companies range from 6-12 months. Director No specific measurements on decision Decision time is very flexible, tied to
lacks backup from board. quality and effect. Just standard case-by-case basis.
No specific measurements on decision sales and profit monitoring. Post investment evaluation is not formal,
quality and effect. Calculations are early in new product just through general sales and profits
Investment decisions are almost never development and sometimes result Investment decisions are often rejected,
rejected based on calculation in rejections. Other rejection factors but mostly on more practical reasons
outcome. More on other factors. are still more common. than calculations.

Which methods, how and why?

Branches are asked to turn in payback They (responder’s personal preference) For M&A projects, EBITDA multiples + DCF seems to be the preferred method
period calculations on the suggested mostly use discounted payback period industry benchmarking may be (mentioned as the standard),
investment and to seek offers from (DPBP) calculations and break-even sufficient for stable profitable and especially for large investments. Its
multiple suppliers. point, as it is easy to understand for smaller businesses but DCF is the results are presented in different ways
HQ uses DCF and industry multipliers as non-financial people. Gatekeepers standard tool for most acquisitions. and some prefer the simplicity of
appropriate. DCF used due to old however can choose their own DCF, used with sensitivity analysis, gives Payback period (discounted or not)
habits, industry trusted and easy to calculation methods. In essence, it is the negotiating framework when working with non-financial
understand and calculate. DCF but presented in timeline instead Within PD, NPV is the preferred method people.
Additionally NPV and IRR are used of cash amounts. and used for selecting and prioritising NPV and IRR are less used but are
where appropriate. The DPBP calculations are not always projects popular to support other calculations
HQ handles calculations in cases of used, but more when justifying WACC formula used to calculate and to prioritise when you have
M&A and other large investments, internal automation projects (e.g. discounting %. Updated for each multiple projects.
and even for smaller investments for invest in a machine vs. using human project but inputs can be very tricky Multiples (such as EBITDA) are popular
Large branches where capability is lacking. labour). Other factors such as quality, especially on emerging markets. The when it comes to M&A.
companies WACC is used to calculate discount rate service, etc. are often more important tendency is to use higher discount % WACC is the preferred method for
based on relevant branches and than the price. to be on the safe side. calculating discounting %. More
countries for the investment Sensitivity analysis is used on business Use ROIC (or RR) rather than IRR, too often, it is calculated for each
opportunity at hand. cases to consider multiple options confusing to have both. investment but it is also used as long-
The Icelandic board had higher Rate of WACC is provided annually from Payback time is calculated in post- term minimum discount rate. Input
Return requirements than can be finance but acts as a minimum mortem acquisition analysis. can be difficult, especially on
expected on most foreign markets. discount requirement. Synergy calculations are used for M&A emerging markets.
Can be difficult to compromise. They use NPV on a gatekeeper level but Some use sensitivity analysis to discuss
They have worked with experts from they don’t use it in discussions or options, risk and to create a
many different countries and it seems reasoning as they don’t feel it is easy negotiation framework.
everyone is using the same to discuss around it. Too complex. These calculations are always used for
calculation tools (same as they are) Also used for impairment test of larger investments but smaller ones
intangible assets on financial are commonly handled without them
statements in cooperation with (other factors more important than
auditors price).

They are using a DCF sensitivity analysis When calculations are made its usually DCF seems to be the preferred method
model that was implemented recently to DCF and IRR based on old habits. IRR (mentioned as the standard), especially
support large investment decisions. is used for double checking (sanity for large investments.
Model designed to handle “what if” checking the WACC). IRR was used in both occasions as a
questions and then discount the WACC used to calculate discount rate with support.
resulting cash flow. input from own accounting and history. Some limited usage of NPV and Payback
WACC is used to calculate the discount Recalculated for each project. period.
rate, recalculated for each project. However, risk and cost of debt are One was using sensitivity analysis
Medium There is not a big focus on the discount % excluded. They use 0 debt and risk is a extensively through a new model.
or risk in calculations. Risk is part of the decision but not the Both where using WACC to calculate
companies discussed and taken in to sensitivity calculations. discount %, but both had
analysis, but risk is never so high as to It is difficult to find useful input for the unconventional ways of finding and/or
threaten the company. There is no Rate WACC on the Icelandic market. Lack using input for that. Icelandic market
of Return requirement from owners. of info is the greatest hindrance on the data limited, risk not included, etc.
In some cases NPV, IRR, Payback period market, but it is slowly improving. Both mentioned that no rate-of-return
and Investment to Equity ratio is used. Machine and supplier decisions often based requirement came from owners and in
Machine and supplier decisions often based on quality and service rather than most cases factors like safety, quality,
on safety, quality and service rather calculations. service, etc., had bigger impact on the
than calculations. Especially for decision than calculation results.
smaller investments.
Cost and revenue are sometimes studied Detailed calculations on unit cost and price No capital budgeting calculations.
down to cash flow level regarding early in design to decide on further Relevant business knowledge not within
investment decisions, but no further development and production. companies.
calculations performed. No capital budgeting calculations. Those calculations that are conducted are
No capital budgeting calculations. Relevant business knowledge not within focused on finding unit cost (for correct
Relevant business knowledge not within company pricing) and in some occasions creating
Small company Raw goods and supplier quality trumps a cash flow for a project, without taking
companies Customers are very few, but large. Some costs almost every time. Decisions it further (such as discounting it).
products are 0 profit but offer cross most often taken based on quality and Other factors have bigger impact on the
selling. They are prepared to lose on service instead of financial calculations. investment decision, such as: quality,
few products if they can keep the service, supplier, cross-selling, etc.
customer and cross sell.
Machine and supplier decisions more based
on quality and service rather than
calculations.

Resource and education?

All decision makers have higher All decision makers have higher Both decision makers and those who In general, these companies have in place
education and long experience. education and long experience. Most calculate have on average higher the right education and experience for
Those who have the correct education or even all calculation resources have education (most often relevant) on all effective investment decision-making
do calculations, those who don’t, high education but not all have levels and high experience too and proper use of capital budgeting
Large escalate the calculations to HQ. relevant business economics Got help from investment bankers on the calculations.
Top management at HQ is the main education. biggest deals. Model making, etc. They often seek consultants for big cases,
companies
driver in improving the investment They get help from Auditors (PWC) It’s the decision makers / gatekeepers either to improve models or just to get
process and its calculation methods regarding NPV use for calculating that drive for the improved process. second opinion.
They get help from consultants on bigger intangible assets for financial Management/gatekeepers are the drivers
cases if they feel it is needed. Mostly statements, mostly because this is for improved process.
to get second opinion on calculations required from compliancy point of
and inputs. view (IFRS) / auditors.
All decision makers have very long All decision makers have very long In general, these companies have in place
experience and high education experience and high education the right education and experience for
including business education in including business education in effective investment decision-making
relevant positions. relevant positions. CFO handles or and proper use of capital budgeting
Managers are the drivers behind the controls most calculations calculations.
investment process Managers are the drivers behind the The owners/board is not involved except
Medium The board has low involvement or investment process, it has been the for largest decisions.
companies demands for investment decision same for a long time. Managers are the drivers for
making. Lots of trust in management. The board is involved in largest improvements of the process
They got external consultants to design a investments but they are not One out of two companies used
new investment calculation model for demanding on the process, just consultants on one occasion (model
a large investment about a year ago. informed. improvement) and got a lot out of it.
Very beneficial and great learning They are not seeking any help from But this seems to be an exception
process. This is their new standard consultants. Current method has rather than rule.
for larger investment decisions. worked well.

Educational level is more technical and Decisions taken and calculations Business knowledge is lacking for use of
industrial, but not much business performed by owner and managers capital budgeting calculations.
education. who do not have the relevant In fact, there is low knowledge on the
Decisions taken and calculations education for capital budgeting subject, or where to find help.
performed by director who does not calculations. Based on feeling and Consultants have not been used for
have the relevant education for capital experience investment decision support or
budgeting calculations. Based on They see the need for that knowledge and calculations (part of the reason is
Small feeling and experience improved calculation methods but cost)
Near future large investment plans can’t currently afford a CFO or Both companies have recognised the need
companies
pressure for improved calculation equivalent to improve investment decisions for
methods. To ensure long term No outside consulting (to expensive) and the future.
benefits of investments. little or no calculation demands from There does not seem to be pressure from
No outside consulting and little or no financial bank banks or owners to use improved
calculation demands from financial They simply use their network to scan for calculations to back up investment
bank (very low debt ratio) knowledge and information when decisions.
Little knowledge on where to find capital needed.
budgeting help/knowledge (the
auditor will be contacted first)

Respondent personal opinion and learning

They feel the need to make the Those models that are easily understood Models are too complex at times, prone Respondents also experienced a gap
investment process more formal as by all (e.g. non-financial people) are for mistakes. Garbage in, garbage between expected use of capital
the company grows. Both as a good models to use. Others can be out. Some companies still pay budgeting models (based on
demand from board/owners, and to too complicated for use and investment bankers or M&A educational theory) and actual use of
keep things under control. discussion. consultant’s high amounts to develop those models in reality.
They do not see the need to make it too Does not follow straight WACC those. Is it worth it? -Too complex, prone for mistakes
formal. It can distract people and get calculation methods. Likes to be on DCF very useful where staple history is -Too complex for non-financial
in the way. Good knowledge is the the safe side and easy understandable missing (or else EBITDA multiples people
best foundation. rules of thumb. E.g. WACC may be are used) -It’s all about the input and not the
Large Talking about the gap between education 8,46% but he uses 10% or 1% per They are industry experts and usually models, and education is lacking there
and reality, they feel students need month. investing within their area of Larger companies require more formality
companies
more real training before entering the Respondent also experiences a gap on expertise. Valuation calculations are and improved investment processes.
market. They are too much like market from capital budgeting important and usually confirming Consultants are not all of the same
robots, focused on feeding their education to actual practise. Does not initially made assumptions based on quality and neutrality must be
models, but are lacking sense on what use much of the formulas he learned industry knowledge. secured.
they are feeding in. in actual practise. It’s too distant to The model was further developed over Valuation multiples are heavily used in
They have better experience of non-financial people. Heavily used in the years and is more sophisticated M&A investments.
independent consultants like the the financial sector where finance and today. It brings professionalism, Industry experts investing in their own
auditing firms, rather than bankers risk are keys. But the education sense of security and a good industry may not need the same level
that are often too invested in the system is still good and valid. discussion platform. In general, they of calculations (due to knowledge) as
opportunity. are happy with the current model. investors investing in multiple
industries (such as bankers)?
They are confident that the new and They see it as more expensive to finance Very different topics discussed here.
improved investment calculation investments on debt rather than on One emphasises learning and benefits of
method is giving better results and equity. That is why they stick to improved investment decision models
Medium more discipline and confident in unformal 0% debt/equity policy Other talks about the high cost of
decision-making (even though the financing investments with debt.
companies
model is still young).
Improved calculations and methods with No, real conclusion here
investment decisions also helps in
discussions with banks regarding
possible financing.

A public company was owner for a There is interest to improve decision and Mixed topics as well here
period of two years. Came with high calculation methods to gain financial One talks about difficult experience
demand for financial reports and overview, improve investment regarding owners and excessive
calculations. High strain on company decision-making and work on complications of financial reporting
Small and bad experience. Relief to get investors relations. They feel the and calculations.
away from that. need for a CFO but can’t currently The other talks about the need to improve
companies
Major decisions (housing) taken by 10 afford it. and the financial strains regarding the
misaligned owners based on limited Growth in volume calls for more cost of it.
support, the cheaper option for the formality and involvement of board.
owners was selected. Future big decisions regarding UK setup
also call for improved investment
decision making.

The common capital budgeting formula matrix – Large companies, summary
Net Present Value (NPV) 1 2
Discounted Cash Flow (DCF) 1 2
Adjusted Present Value (APV) 2
Internal Rate of Return (IRR) 1 1 1
Payback period, discounted Payback 2 1
or break-even point
Rate of return 1 1
Profitability index 3
Decision trees or sensitivity analysis 2 1
Other 1
Capital Asset Pricing Model 2
(CAPM)
Weighted Average Cost of Capital 3
(WACC)
Other
I don’t calculate but directly use the 1
stakeholder, e.g.:
- Cost of equity
- Cost of debt
- Other
The common capital budgeting formula matrix – Medium companies, summary
Net Present Value (NPV) 1 1
Discounted Cash Flow (DCF) 1 1
Internal Rate of Return (IRR) 1 1
Payback period, discounted Payback 2
or break-even point
Rate of return 1
Decision trees or sensitivity analysis 1 1
Other
(CAPM)
Weighted Average Cost of Capital 1 1
(WACC)
Other
I don’t calculate but directly use the
stakeholder, e.g.:
- Cost of equity
- Cost of debt
- Other
The common capital budgeting formula matrix – Small companies, summary
Net Present Value (NPV) 2
Discounted Cash Flow (DCF) 2
Internal Rate of Return (IRR) 2
Payback period, discounted Payback 2
or break-even point
Rate of return 2
Decision trees or sensitivity analysis 2
Other
(CAPM)
Weighted Average Cost of Capital 2
(WACC)
Other
I don’t calculate but directly use the 2
stakeholder, e.g.:
- Cost of equity
- Cost of debt
- Other

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MSc in Corporate Finance

A STUDY ON THE USE OF CAPITAL

Reykjavik University June, 2017

Keywords: Capital Budgeting; Corporate Finance; Investment decisions; Case Study;

Reykjavik University June, 2017

The main research question is:

• How and why do Icelandic companies, regularly faced with investment

The following sub-questions will also be addressed:

1. What is the current main usage (if any usage at all)?

2. What affects the use of capital budgeting methods (method complexity,

3. Is there room for usage improvement (and how)?

4. Is there a noticeable difference from the usage in other countries?

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Although this research is avoiding professionals in capital budgeting usage (finance

Reykjavik University June, 2017

In this light, it is interesting to compare the theories of March to Mukhlynina &

The main research question is:

• How and why do Icelandic companies, regularly faced with investment

Reykjavik University June, 2017

The following sub-questions will also be addressed:

5. What is the current main usage (if any usage at all)?

6. What affects the use of capital budgeting methods (method complexity,

7. Is there room for usage improvement (and how)?

8. Is there a noticeable difference from the usage in other countries?

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Picture 1: Case Study Method (Yin, 2009, p.57)

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4.3.1. Questionnaire development

Reykjavik University June, 2017

Reykjavik University June, 2017

Additionally, the results will be compared to the decision-making theories of March

• Universities, consulting firms and consulting branches of financial companies,

Reykjavik University June, 2017

Reykjavik University June, 2017

5.1. General understanding and main process

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5.2. Goals and statistics

Reykjavik University June, 2017

Reykjavik University June, 2017

5.3. Which methods, how and why?

Reykjavik University June, 2017

Reykjavik University June, 2017

5.4. Resource and education

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5.5. Respondent personal opinion and learning

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

7.1. The research questions

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017

Reykjavik University June, 2017